**Exhibit 13.1**

 

**INTERNATIONAL**

 

**ALUMINUM**

 

**CORPORATION**

 

 

**2005 Annual Report**

 

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**COMPANY PROFILE**

 

**INTERNATIONAL ALUMINUM CORPORATION** is an integrated building productsmanufacturer of diversified lines of quality aluminum and vinyl products.  The Company is headquartered in MontereyPark, California, and has approximately 1,500 employees.  Operations are conducted through twelve NorthAmerican subsidiaries.  The Company’sprimary Internet website is located at www.intlalum.com.

 

**PRODUCTS BY SEGMENT**

 

**COMMERCIAL**- Curtainwalls, window walls, slope glazed systems, storefront framing,entrance doors and frames, commercial operable windows, including products forstorm and blast-resistant applications; interior officefronts, officepartitions and interior doors and frames for the commercial building and tenantimprovement markets.  Product informationis available at www.usalum.com and www.racointeriors.com.

 

**RESIDENTIAL**- Extensive lines of windows and patio doors manufactured from vinyland aluminum and aluminum wardrobe mirror doors for the residential buildingand remodeling markets.  Productinformation is available at www.intlwindow.com.

 

**ALUMINUM EXTRUSION**- Mill finish, anodized, painted and fabricated aluminumextrusions.  Product information isavailable at www.intlextrusion.com.

 

**CONTENTS**

 
| Financial Highlights                                                                        |   |
|---------------------------------------------------------------------------------------------|--------|
| Letter to Shareholders                                                                      |   |
| Selected Financial Data                                                                     |   |
| Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
| Quarterly Financial Data                                                                    |   |
| Certifications                                                                              |   |
| Management’s Report on  Internal Control Over Financial Reporting                      |   |
| Report of Independent  Registered Public Accounting Firm                                    |   |
| Consolidated Financial Statements                                                           |   |
| Notes to  Consolidated Financial Statements                                                 |   |
| Corporate Information                                                                       |   |
| Subsidiaries by Segment                                                                     |   |

 

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**FINANCIALHIGHLIGHTS**

FiscalYears Ended June 30, 2005, 2004 and 2003

 
| ** **                                            | ** ** | **2005**    | ** **  | **2004**    | ** ** | **2003**    | ** ** |
|-------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
|                                                  |       |        |        |        |       |        |       |
| **Operating Results:**                                |       |        |        |        |       |        |       |
|                                                  |       |        |        |        |       |        |       |
| Net sales                                             |       | $           | 251,588,000 |        | $          | 213,034,000 |       | $ | 192,549,000 |   |
|                                                  |       |        |        |        |       |        |       |
| Income from continuing operations                     |       | $           | 12,942,000  |        | $          | 6,529,000   |       | $ | 4,426,000 |   |
| Income (loss) from discontinued operations            |       | —      |        | 129,000     |       | (1,697,000  | )          |
| Net income                                            |       | $           | 12,942,000  |        | $          | 6,658,000   |       | $ | 2,729,000 |   |
|                                                  |       |        |        |        |       |        |       |
| **Financial Data:**                                   |       |        |        |        |       |        |       |
|                                                  |       |        |        |        |       |        |       |
| Net cash provided by operating activities             |       | $           | 5,199,000   |        | $          | 12,146,000  |       | $ | 14,715,000 |   |
| Capital expenditures                                  |       | 4,246,000   |        | 3,482,000   |       | 2,847,000   |       |
|                                                  |       |        |        |        |       |        |       |
| Cash and cash equivalents                             |       | 12,437,000  |        | 15,964,000  |       | 12,570,000  |       |
| Working capital                                       |       | 77,554,000  |        | 67,860,000  |       | 62,929,000  |       |
| Long-term debt                                        |       | —      |        | —      |       | —      |       |
| Shareholders’ equity                             |       | 120,503,000 |        | 111,206,000 |       | 109,536,000 |       |
|                                                  |       |        |        |        |       |        |       |
| **Per Share Data:**                                   |       |        |        |        |       |        |       |
|                                                  |       |        |        |        |       |        |       |
| Continuing operations - Diluted                       |       | $           | 3.04        |        | $          | 1.54        |       | $ | 1.04 |   |
| Income (loss) from discontinued operations  - Diluted |       | —      |        | .03         |       | (.40        | )          |
| Net income - Diluted                                  |       | $           | 3.04        |        | $          | 1.57        |       | $ | .64 |   |
|                                                  |       |        |        |        |       |        |       |
| Dividends declared                                    |       | $           | 1.20        |        | $          | 1.20        |       | $ | 1.20 |   |
|                                                  |       |        |        |        |       |        |       |
| Book value at year end                                |       | 28.22       |        | 26.20       |       | 25.80       |       |
| Market price at year end                              |       | 31.95       |        | 29.10       |       | 21.85       |       |

 

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# **To Our Shareholders**

 

# **By any measure, fiscal 2005was a successful year for International Aluminum Corporation.  Our sales revenue was a record $251,588,000,an 18% increase from the $213,034,000 for fiscal 2004.  Net income was $12,942,000 or $3.04 pershare, a 94% increase over the $6,658,000 or $1.57 for the 2004 fiscal year.**

# ** **

# **During this year the Companywas required for the first time to comply with the internal control provisionsof the Sarbanes-Oxley Act.  The projectwas successfully completed on a timely basis. While it was done in the most efficient and cost effective methodavailable, the Company incurred $780,000 in pretax costs, or 11¢ per share, forthe necessary consulting and additional auditing services.**

 

# **Commercial Products**

 

# **Better-than-forecast marketconditions throughout most of fiscal 2005 opened the door for our CommercialProducts Group.  Utilizing our reputationfor outstanding customer service and a well stocked inventory, we were wellpositioned to take advantage of the improved market and were able tosignificantly increase sales volume. Additionally, increases in selling prices and improvements inproductivity have more than offset the rising costs of materials, wages andinsurance.  This resulted in an 86%increase in Operating Profit on a 25% increase in Sales.**

# ** **

# **New product developmentcontinues to be a top priority.  Severalnew products were introduced in fiscal 2005 and more are slated for 2006.  All are expected to increase our marketshare.**

 

# **Residential Products**

 

Our Residential Products Groupachieved record sales and posted excellent income from operations. Oursustained growth reflects the continued strong market for residential windowsand doors and our introduction of newly developed products.  We are most excited about our new aluminumenergy window, the Ambassador Series. This innovative new product features ThermoTechTMtechnology and will be introduced to the Arizona market as one of the fewaluminum windows that meets Energy Star requirements.

# ** **

# **The California marketcontinues its transition from aluminum to vinyl windows and doors.  To meet the increasing demand for vinyl products,we have completed the expansion of our Northern California facility and arecontinuing to invest in additional automated fabrication equipment to provideadditional production capacity.**

 

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# **Aluminum Extrusions**

 

# **The lack of improvedperformance in our Aluminum Extrusion Group has been a disappointment. Aluminumraw material costs reached a 10-year high during fiscal 2005, which coupledwith a tight supply during the first half of the year, posed a challenge forthis Group.**

# ** **

# **The yearlong rise in Aluminumprices led to an 18% increase in sales revenue on a 6% increase in totaltonnage shipped.  The market pricing foraluminum extrusions continued to be very competitive and reflected furtherdownward pressure from foreign off shore extruders.**

# ** **

# **Production improvementsbrought about by recent changes in leadership and expertise in our extrusionoperations are starting to have a positive impact in both quality andquantity.  Executive management isclosely working with Group personnel and is monitoring the changes and thedesired improvements.**

# ** **

# **Financial Condition**

# ** **

# **Our financial conditioncontinues to be excellent as we concluded the year with more than $12 millionin cash and cash equivalents, in excess of $77 million in working capital, acurrent ratio over 4 and no long-term debt. Capital expenditures for fiscal 2006 are currently projected to be $6.5million, approximately the same level as our non-cash depreciation charges.**

# ** **

# ** **

| **Cornelius C. Vanderstar** | **Ronald L. Rudy**                         |
|-----------------------------|--------------------------------------------|
| **Chairman of the Board**   | **President and Chief  Executive Officer** |

# ** **

# **September 2, 2005**

 

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**SELECTEDFINANCIAL DATA**

 
| **Year  Ended June 30**   | ** ** | **2005**    | ** **  | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** **  | **2001**    | ** ** |
|--------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
|                           |       |        |        |        |       |        |       |        |        |        |       |
| **Sales by Segment**           | ** ** | ** **  | ** **  | ** **  | ** ** | ** **  | ** ** | ** **  | ** **  | ** **  | ** ** |
| Commercial                     |       | $           | 123,034,000 |        | $          | 98,789,000  |       | $           | 97,345,000  |        | $          | 108,510,000 |   | $ | 114,436,000 |   |
| Residential                    |       | 74,131,000  |        | 64,947,000  |       | 53,586,000  |       | 44,352,000  |        | 52,822,000  |       |
| Aluminum Extrusion             |       | 54,423,000  |        | 49,298,000  |       | 41,618,000  |       | 38,567,000  |        | 40,085,000  |       |
| Total net sales                |       | $           | 251,588,000 |        | $          | 213,034,000 |       | $           | 192,549,000 |        | $          | 191,429,000 |   | $ | 207,343,000 |   |
|                           |       |        |        |        |       |        |       |        |        |        |       |
| **Earnings**                   |       |        |        |        |       |        |       |        |        |        |       |
| Gross profit                   |       | $           | 58,111,000  |        | $          | 43,998,000  |       | $           | 35,350,000  |        | $          | 33,999,000 |   | $ | 39,929,000 |   |
|                           |       |        |        |        |       |        |       |        |        |        |       |
| Continuing operations          |       | $           | 12,942,000  |        | $          | 6,529,000   |       | $           | 4,426,000   |        | $          | 1,485,000 |   | $ | 5,212,000 |   |
| Discontinued operations*       |       | —      |        | 129,000     |       | (1,697,000  | )          | (1,533,000  | )           | (578,000    | )          |
| Cum. effect of acctg. Change   |       | —      |        | —      |       | —      |       | (7,935,000  | )           | —      |       |
| Net income (loss)              |       | $           | 12,942,000  |        | $          | 6,658,000   |       | $           | 2,729,000   |        | $          | (7,983,000 | ) | $ | 4,634,000 |   |
|                           |       |        |        |        |       |        |       |        |        |        |       |
| Per share:                     |       |        |        |        |       |        |       |        |        |        |       |
| Continuing operations          |       | $           | 3.04        |        | $          | 1.54        |       | $           | 1.04        |        | $          | .35 |   | $ | 1.23 |   |
| Discontinued operations*       |       | —      |        | .03         |       | (.40        | )          | (.36        | )           | (.14        | )          |
| Cum. effect of acctg. Change   |       | —      |        | —      |       | —      |       | (1.87       | )           | —      |       |
| Net income (loss) - Diluted    |       | $           | 3.04        |        | $          | 1.57        |       | $           | .64         |        | $          | (1.88 | ) | $ | 1.09 |   |
|                           |       |        |        |        |       |        |       |        |        |        |       |
| Dividends declared             |       | $           | 1.20        |        | $          | 1.20        |       | $           | 1.20        |        | $          | 1.20 |   | $ | 1.20 |   |
|                           |       |        |        |        |       |        |       |        |        |        |       |
| **Financial Data at Year End** |       |        |        |        |       |        |       |        |        |        |       |
| Cash and cash equivalents      |       | $           | 12,437,000  |        | $          | 15,964,000  |       | $           | 12,570,000  |        | $          | 3,495,000 |   | $ | 5,915,000 |   |
| Working capital                |       | 77,554,000  |        | 67,860,000  |       | 62,929,000  |       | 58,057,000  |        | 66,097,000  |       |
| Total assets                   |       | 151,631,000 |        | 141,882,000 |       | 133,243,000 |       | 132,724,000 |        | 148,070,000 |       |
| Long-term debt                 |       | —      |        | —      |       | —      |       | —      |        | —      |       |
| Shareholders’ equity      |       | 120,503,000 |        | 111,206,000 |       | 109,536,000 |       | 110,805,000 |        | 123,755,000 |       |

 

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*For further details relating to discontinued operations refer to Note 8.

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

# **Significant Changes inResults of Operations**

 

**2005 vs. 2004**

 

GeneralOverview

 

Netsales for fiscal 2005 increased $38,554,000 or 18.1% from fiscal 2004.  All Groups achieved increased sales during2005 compared to the prior year.  Grossprofit increased to 23.1% of sales in 2005 compared to 20.7% in 2004.  All Groups realized reductions, to varyingdegrees, in their cost of sales percentages during fiscal 2005 compared to theprior year.  Selling, general and administrativeexpenses increased $3,763,000, but declined as a percentage of net sales to14.8% of sales in fiscal 2005 compared to 15.8% in fiscal 2004.

 

TheCompany includes product costs, inbound freight, purchasing, receiving,inspection, internal transfer, warehousing and other costs of the Company’sdistribution network in cost of goods sold, thereby reducing gross profit bythese amounts.  Cost of sales and grossprofit as a percent of sales for the Company may not be comparable to those ofother companies in our industry, since other entities may record purchasing,warehousing and distribution costs as selling, general and administrativeexpense.

 

Thecontribution to these results by each segment is discussed below.

 

CommercialProducts

 

Salesof the Commercial Products Group increased $24,245,000 or 24.5% compared to the2004 year.  This gain reflects increasedcommercial construction activity together with increased sales prices, expandedgeographic market penetration and new product development.  Gross profit increased to 24.3% of sales infiscal 2005 compared to 21.5% in 2004.  Despiteexperiencing higher aluminum costs, this Group achieved decreased material,labor and overhead cost percentages mainly due to improved margins generated asa result of the substantially higher sales volume coupled with increasedprices.  Selling, general andadministrative expenses increased $1,433,000, although as a percentage of salesdecreased to 11.8% of sales compared to 13.1% of sales in 2004. These increasedexpenses reflect additional employment and sales representation costs of$1,532,000 for the year related to the increase in sales and achievement ofincentive compensation targets. Partially offsetting the increase was $180,000 of income related toretrospective adjustments to workers’ compensation insurance policies.

 

ResidentialProducts

 

Salesof the Residential Products Group increased $9,184,000 or 14.1% compared to the2004 year.  Consumer demand continued tostimulate new home construction, re-sales of existing homes and homeimprovement spending in the areas served by this Group.  New product development and more aggressivepromotional programs also contributed to the increase.  Gross profit increased to 31.3% of sales infiscal 2005 compared to 29.9% in 2004. Although the material cost percentage was unchanged from the prior year,this Group experienced decreased labor and overhead cost percentages comparedto the prior year reflecting production efficiencies attained from thesubstantially higher sales volume coupled with a decrease of $368,000 forcurrent year workers’ compensation claims. Selling, general and administrative expenses increased $981,000, butdecreased as a percentage of sales to 12.7%

 

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ofsales in fiscal 2005 compared to 13.0% of sales in 2004.  This increase is mainly attributable toincreases of $317,000 for advertising and promotional costs, $299,000 forcurrent year general liability insurance costs, and $178,000 for additionalemployment related to the increase in sales.

 

AluminumExtrusion

 

Salesof the Aluminum Extrusion Group increased $5,125,000 or 10.4% compared to the2004 year.  Although net tonnage shippedto outside customers decreased 2.5%, particularly in the area served by ourCalifornia facility, the Group benefited from an increase in sellingprices.  Cost of sales as a percentage ofsales at 96.1% for fiscal 2005, was only slightly better than the 96.2%recorded in fiscal 2004.  Due to thehighly competitive marketplace, selling prices were increased directly in linewith the increased cost of aluminum resulting in increased material cost percentagesand decreased labor and overhead cost percentages for the current year.  Additionally, labor and overhead productionefficiencies gained from higher total tonnage output, including intercompanycustomers, decreased labor and overhead cost percentages for the current year.These gains served to offset increased material cost percentages.  Selling, general and administrative expensesincreased $584,000, although as a percentage of sales remained unchanged at 3.1%of sales compared to last year.  Thisincrease reflects increased costs of $560,000 for retrospective adjustments toworkers’ compensation insurance policies.

 

Corporate

 

Generaland administrative expenses increased $765,000, but decreased as a percentageof consolidated net sales to 3.9% of net sales in fiscal 2005 compared to 4.2%in 2004.  The increase is mainlyattributable to $780,000 for costs related to complying with the internalcontrol sections of the Sarbanes-Oxley legislation.  Additional costs of $199,000 were incurredduring the current year relating to higher employment and recruitment expenseand $104,000 for increased costs for retrospective adjustments to workers’compensation and general liability insurance policies.  Partially offsetting these increases was aone-time recovery of $265,000 for current and prior year legal fees that wasrecorded as a result of a settlement.

 

Theincrease in interest income relates to increased funds available for investmentduring the year combined with higher rates of return compared to last year.

 

Theeffective tax rate increased to 38.0% in fiscal 2005 compared to 37.7% lastyear.

 

**2004 vs. 2003**

 

GeneralOverview

 

Netsales for fiscal 2004 increased $20,485,000 or 10.6% from fiscal 2003.  All Groups achieved increased sales during2004 compared to 2003.  Gross profitincreased to 20.7% of sales in 2004 compared to 18.4% in 2003.  All Groups realized reductions, to varyingdegrees, in their cost of sales percentages during fiscal 2004 compared to fiscal2003.  Selling, general and administrativeexpenses increased $5,107,000 to 15.8% of sales in fiscal 2004 compared to14.8% in fiscal 2003.

 

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TheCompany includes product costs, inbound freight, purchasing, receiving,inspection, internal transfer, warehousing and other costs of the Company’sdistribution network in cost of goods sold, thereby reducing gross profit bythese amounts.  Cost of sales and grossprofit as a percent of sales for the Company may not be comparable to those ofother companies in our industry since other entities may record purchasing,warehousing and distribution costs as selling, general and administrativeexpense.

 

Thecontribution to these results by each segment is discussed below.

 

CommercialProducts

 

Salesof the Commercial Products Group increased $1,444,000 or 1.5% in fiscal 2004 comparedto the 2003 year.  This increase was dueto the substantial gains achieved during the fourth quarter, $4,027,000 or17.1% compared to the same period of the 2003 year.  Throughout most of 2004 this group wasnegatively impacted by a soft commercial construction market coupled withincreased competitive conditions. Sales of newly developed product lineslessened the negative impact.  The 2004 fourthquarter results stemmed from recently increased construction activity togetherwith increased sales prices.  Grossprofit increased to 21.5% of sales in fiscal 2004 compared to 19.5% in2003.  This Group achieved lower costpercentages compared to 2003 mainly due to improved margins generated as aresult of the aforementioned fourth quarter sales increase.  In addition, 2003 had unusually high materialcosts for some major projects at the United States Aluminum facility inTexas.  Selling, general andadministrative expenses increased $768,000 to 13.1% of sales in fiscal 2004compared to 12.6% of sales in 2003.  Thisincrease was mainly due to an increase of $459,000 for employment costs relatedto achievement of incentive compensation targets, $200,000 for retrospectiveworkers’ compensation and general liability insurance policies and $175,000 foremployment and sales representation costs related to the increase in sales.

 

ResidentialProducts

 

Salesof the Residential Products Group increased $11,361,000 or 21.2% in fiscal 2004compared to the 2003 year.  Low interestrates and increased consumer confidence continued to stimulate new homeconstruction, re-sales of existing homes and home improvement spending.  In addition, sales at our South Gate,California facility continued to improve due to increased customer confidencein product quality and customer service that had suffered during the prolongedstrike in fiscal 2002.  New productdevelopment and new marketing and advertising programs have also contributed tothe increase.  Gross profit increased to29.1% of sales in fiscal 2004 compared to 27.1% in 2003.  This Group experienced decreased material,labor and overhead cost percentages compared to 2003 reflecting productionefficiencies attained from additional automation and the substantially highersales volume.  Selling, general andadministrative expenses increased $2,502,000 to 13.0% of sales in fiscal 2004compared to 11.2% of sales in 2003.  Thisincrease included $1,064,000 for retrospective workers’ compensation andgeneral liability insurance policies, $543,000 for additional employmentrelated to the increase in sales and attainment of incentive compensationtargets, $451,000 for advertising and promotional costs, and $119,000 for fiscal2004 general liability insurance costs.

 

AluminumExtrusion

 

Sales of the Aluminum Extrusion Groupincreased $7,680,000 or 18.5% in fiscal 2004 compared to the 2003 year.  Net tonnage shipped increased 13.9%.  The Extrusion Group continued to benefit fromexpanded geographic market penetration, particularly the area served by our

 

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Texas facility.  Still subject to a highly competitive market,the Group increased sales prices during the latter part of the yearcommensurate with the increased cost of aluminum.  Gross profit increased to 3.8% of sales infiscal 2004 compared to 2.5% in 2003.  ThisGroup, while absorbing higher material costs compared to 2003, posted decreasedlabor and overhead cost percentages primarily due to production efficienciesresulting from the higher tonnage output. Selling, general and administrative expenses increased $657,000 to 3.1%of sales in fiscal 2004 compared to 2.8% of sales in 2003.  This increase was mainly attributable to$478,000 for additional employment and sales representation costs related tothe increase in sales and achievement of incentive compensation targets.

 

Corporate

 

Generaland administrative expenses increased $1,180,000 to 4.2% of consolidated netsales in fiscal 2004 compared to 4.0% in 2003. The increase was mainly attributable to $907,000 of employment costsrelated to achievement of incentive compensation targets.  Included in 2003 was $162,000 related to arefund of prior years insurance fees and costs that served to offset overallexpenses.

 

Theswing from net interest expense in fiscal 2003 to net interest income in fiscal2004 relates to increased funds available for investment during the year inaddition to lower utilization of our foreign lines of credit.

 

Theeffective tax rate increased to 37.7% in fiscal 2004 compared to 35.7% infiscal 2003.

 

**Liquidity and Capital Resources**

 

Cashand cash equivalents at June 30, 2005 was $12,437,000 compared to$15,964,000 at June 30, 2004 and $12,570,000 at June 30, 2003.  Working capital at June 30, 2005 was $77,554,000compared to $67,860,000 at June 30, 2004 and $62,929,000 at June 30,2003.  The ratio of current assets tocurrent liabilities was 4.1 at the end of 2005 compared to 3.8 at the end of2004 and 4.6 at the end of 2003. The Company continues to be in excellentposition to meet its short-term operating and discretionary cash requirements.  Funds in excess of current operatingrequirements are invested in short-term interest-bearing instruments.

 

Netcash provided by operating activities was approximately $5.2 million, $12.1million and $14.7 million in fiscal 2005, 2004 and 2003, respectively.  Cash used in investing activities was utilizedfor capital expenditures for property, plant and equipment of approximately $4,246,000in 2005, $3,482,000 in 2004 and $2,847,000 in 2003 and were financed throughinternal cash flow and cash reserves. Cash flows included proceeds from the sale of an excess facility of$2,450,000 in fiscal 2003.  The Companyprojects net capital expenditures of approximately $6,500,000 for fiscal 2006for expansion of production capacity, as well as normal recurring capitalizedreplacement items.  The Companyanticipates financing these expenditures through internal cash flow and cashreserves.  Cash used in financingactivities during the past three years was utilized mainly for payment ofshareholder dividends as authorized by the Board of Directors.

 

TheCompany had no long-term debt outstanding at the end of 2005, 2004, or 2003.  The Company had $22,450,000 in availablecredit at the end of 2005 under short-term borrowing

 

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arrangements(see Note 3).

 

The Company’s financial condition remainsstrong.  The Company believes that itscash, other liquid assets, operating cash flows and borrowing capacity, takentogether, provide more than adequate resources to fund ongoing operatingrequirements and future capital expenditures related to the expansion ofexisting businesses.

 

**Inflation, Trends, and General Considerations**

 

From2003 to 2005, inflation has been relatively low and we believe that inflationhas not had a material effect on our results of operations.  Our performance is dependent to a significantextent upon levels of new construction, repair and remodeling for residentialand commercial construction, all of which are affected by such factors asinterest rates, consumer confidence and economic outlook.  In the near term, we expect to operate in anenvironment of relatively stable levels of construction and remodelingactivity. However, increases in interest rates could have a negative impact onthe level of housing construction and remodeling activity.  The demand for our products is seasonal,particularly in the colder regions of North America where inclement weatherduring the winter months usually reduces the level of building and remodelingactivity.  We usually experience lowersales levels during the second and third quarters of our fiscal year.

 

**Critical Accounting Policies**

 

TheSummary of Accounting Policies within the Notes to the Consolidated FinancialStatements includes the significant policies and procedures used in thepreparation of the Company’s consolidated financial statements. The followingis a discussion of each of the Company’s critical accounting policies:

 

## *Revenue Recognition*

 

Sales are recognized when products areshipped or when services are provided, assuming no significant Company obligationsremain and the collection of related receivables is probable.  Revenue recognition on product sales is notsubject to significant estimates, as the Company has not experiencedsignificant product returns.

 

## *Valuation of Receivables*

 

Themajority of the Company’s accounts receivable arises from sales of productsunder typical industry trade terms. Trade accounts receivable are stated at cash due from customers lessallowances for doubtful accounts. Past due amounts are determined based onestablished terms and charged-off when deemed uncollectible.

 

TheCompany records an allowance for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments.  The allowance is based on management’sassessment of the business environment, customers financial condition, accountsreceivable aging and historical collection expense.  Changes in any of these items may impact thelevel of future write-offs.

 

### ***Valuation of Inventory***

 

The Company periodically reviews inventoryitems and overall stocking levels to ensure that adequate reserves exist forinventory deemed obsolete or excessive. In making this

 

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determination, the Company considershistorical stocking levels, recent sales of similar items and anticipated demandfor these items. Changes in factors such as customer demand, new productofferings and other matters could affect the level of inventory obsolescence inthe future.

 

### ***Deferred Income Taxes***

 

Deferred income taxes are determinedbased on the difference between the financial statement and tax bases of assetsand liabilities using enacted tax laws and rates (see Note 9).

 

**Current and Pending Accounting Changes**

 

The American Jobs Creation Act of 2004(the “AJCA”) was signed into law on October 22, 2004.  The AJCA contains numerous changes to U.S.tax law, both temporary and permanent in nature, including a potential taxdeduction with respect to certain qualified domestic manufacturing activities,changes in the carryback and carryforward utilization periods for foreign taxcredits and a dividend received deduction with respect to accumulated incomeearned abroad.  The new law couldpotentially have an impact on our effective tax rate, future taxable income andcash and tax planning strategies, amongst other effects.  We are currently in the process of evaluatingthe impact that the Act will have on our financial position and results ofoperations.  See Note 11 for additionalinformation.

 

InNovember 2004, the Financial Accounting Standards Board (FASB) issued SFASNo. 151, “Inventory Costs” (SFAS 151), which clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial.  SFAS 151 will be effective forinventory costs incurred beginning July 1, 2005.  Upon adoption in fiscal year 2006 we do notanticipate that SFAS 151 will have a material impact on our financialstatements.

 

InDecember 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-BasedPayment”, which replaced SFAS No. 123 and superseded APB Opinion No. 25.SFAS No. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values in the first interim or annual period beginningafter June 15, 2005.  The pro formadisclosures previously permitted under SFAS No. 123 will no longer be analternative to financial statement recognition. As disclosed in Note 1 under Stock Based Compensation, we do not believethe adoption of SFAS 123R will have an impact on our financial statements.

 

InMarch 2005, the FASB issued Financial Interpretation No. 47 (FIN 47),“Accounting for Conditional Asset Retirement Obligations”.  FIN 47 is an interpretation of FASB StatementNo. 143, “Accounting for Asset Retirement Obligations” and clarifies (i) thatan entity is required to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated and (ii) when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation.  Upon adoption in fiscal year2006 we do not anticipate that FIN 47 will have a material impact on ourfinancial statements.

 

InMay 2005, the FASB issued SFAS No. 154 (SFAS 154), “AccountingChanges and Error Corrections – a replacement of APB Opinion No. 20 andFASB Statement No. 3”.  Under theprevious guidance, most voluntary changes in accounting principle were requiredto be recognized as the cumulative effect of a change in accounting principlewithin the net

 

----

 

incomeof the periods in which the change is made. SFAS 154 requires retrospective application to prior period financialstatements of a voluntary change in accounting principle, unless it is impracticableto do so.  SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

 

**Forward-Looking Information**

 

Thisannual report contains forward-looking statements with respect to the financialcondition, results of operations and business of the Company.  Such items are subject to certain risks anduncertainties that could cause actual results to differ materially from thoseset forth in such statements. Readers are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date thestatement was made.  The Companyundertakes no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

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**QUARTERLY FINANCIAL DATA (UNAUDITED)**

Forthe years ended June 30, 2005 and 2004

 
| ** **                              | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2005**                                |       |               |       |                |       |               |       |                |       |
| Net sales                               |       | $                  | 60,727,000 |                | $          | 61,759,000         |       | $                   | 62,088,000 |   | $ | 67,014,000 |   |
|                                    |       |               |       |                |       |               |       |                |       |   |   |   |   |
| Gross profit                            |       | 13,964,000         |       | 13,702,000          |       | 13,894,000         |       | 16,551,000          |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Net income                              |       | 3,034,000          |       | 2,791,000           |       | 2,731,000          |       | 4,386,000           |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Earnings per share - Basic and Diluted: |       |               |       |                |       |               |       |                |       |
| Net income                              |       | .71                |       | .66                 |       | .64                |       | 1.03                |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Dividends declared                      |       | .30                |       | .30                 |       | .30                |       | .30                 |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Stock price - High                      |       | 30.33              |       | 34.40               |       | 35.74              |       | 35.49               |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Stock price - Low                       |       | 25.70              |       | 28.25               |       | 31.10              |       | 30.40               |       |
|                                    |       |               |       |                |       |               |       |                |       |
| **2004**                                |       |               |       |                |       |               |       |                |       |
| Net sales                               |       | $                  | 52,956,000 |                | $          | 50,698,000         |       | $                   | 50,064,000 |   | $ | 59,316,000 |   |
|                                    |       |               |       |                |       |               |       |                |       |   |   |   |   |
| Gross profit                            |       | 10,558,000         |       | 11,014,000          |       | 9,473,000          |       | 12,953,000          |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Income from continuing operations       |       | 1,538,000          |       | 1,562,000           |       | 855,000            |       | 2,574,000           |       |
| Income from discontinued operations*    |       | 41,000             |       | 88,000              |       | —             |       | —              |       |
| Net income                              |       | 1,579,000          |       | 1,650,000           |       | 855,000            |       | 2,574,000           |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Earnings per share - Basic and Diluted: |       |               |       |                |       |               |       |                |       |
| Continuing operations                   |       | .36                |       | .37                 |       | .20                |       | .61                 |       |
| Discontinued operations*                |       | .01                |       | .02                 |       | —             |       | —              |       |
| Net income                              |       | .37                |       | .39                 |       | .20                |       | .61                 |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Dividends declared                      |       | .30                |       | .30                 |       | .30                |       | .30                 |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Stock price - High                      |       | 23.87              |       | 28.50               |       | 35.00              |       | 32.86               |       |
|                                    |       |               |       |                |       |               |       |                |       |
| Stock price - Low                       |       | 20.85              |       | 21.72               |       | 25.78              |       | 27.85               |       |

 

----

*For further details relating to discontinued operations refer to Note 8.

 

----

 

**CERTIFICATIONS**

 

InternationalAluminum Corporation (a) has filed the CEO and CFO certifications requiredby Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits to its AnnualReport on Form 10-K for the year ended June 30, 2005 and (b) willsubmit to the New York Stock Exchange (NYSE) the 2005 Annual CEO Certificationregarding compliance with the NYSE corporate governance listing standards.

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIALREPORTING**

 

InternationalAluminum Corporation’s management is responsible for establishing andmaintaining adequate internal control over the Company’s financialreporting.  The Company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof the consolidated financial statements and related disclosures in accordancewith generally accepted accounting principles. The Company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions ofthe Company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of the consolidated financialstatements and related disclosures in accordance with generally acceptedaccounting principles; (3) provide reasonable assurance that receipts andexpenditures of the Company are being made only in accordance withauthorizations of management and directors of the Company; and (4) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the Company’s assets that could have amaterial effect on the consolidated financial statements and relateddisclosures.

 

Becauseof inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies and procedures may deteriorate.

 

TheCompany assessed the effectiveness of its internal control over financialreporting as of June 30, 2005.  Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”) in *INTERNAL CONTROL-INTEGRATED FRAMEWORK*.

 

Basedupon management’s assessment using the criteria contained in COSO, the Company’smanagement has concluded that, as of June 30, 2005, International AluminumCorporation’s internal control over financial reporting was effective.

 

Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of June 30, 2005 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders of International Aluminum Corporation:

 

Wehave completed an integrated audit of International Aluminum Corporation’s 2005consolidated financial statements and of its internal control over financialreporting as of June 30, 2005 and audits of its 2004 and 2003 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

 

Consolidatedfinancial statements

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income, shareholders’ equity and cash flows presentfairly, in all material respects, the financial position of InternationalAluminum Corporation and its subsidiaries at June 30, 2005 and 2004, andthe results of their operations and their cash flows for each of the threeyears in the period ended June 30, 2005 in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

Internalcontrol over financial reporting

 

Also,in our opinion, management’s assessment, included in the accompanying Management’sReport On Internal Control Over Financial Reporting, that the Companymaintained effective internal control over financial reporting as of June 30,2005 based on criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria.  Furthermore, in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of June 30, 2005, based on criteria established in *Internal Control - Integrated Framework* issued by the COSO.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financialreporting.  Our responsibility is toexpress opinions on management’s assessment and on the effectiveness of theCompany’s internal control over financial reporting based on our audit.  We conducted our audit of internal controlover financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  An audit of internal control over financialreporting includes obtaining an understanding of internal control overfinancial reporting, evaluating management’s assessment, testing and evaluatingthe design and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinions.

 

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Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

PricewaterhouseCoopersLLP

LosAngeles, California

September 2,2005

 

# **INTERNATIONALALUMINUM CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

Forthe years ended June 30, 2005, 2004 and 2003

 
| ** **                                             | ** ** | **2005**    | ** **  | **2004**    | ** ** | **2003**    | ** ** |
|--------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| Net sales                                              |       | $           | 251,588,000 |        | $          | 213,034,000 |       | $ | 192,549,000 |   |
| Cost of sales                                          |       | 193,477,000 |        | 169,036,000 |       | 157,199,000 |       |
| Gross profit                                           |       | 58,111,000  |        | 43,998,000  |       | 35,350,000  |       |
| Selling, general and administrative expenses           |       | 37,318,000  |        | 33,555,000  |       | 28,448,000  |       |
| Income from operations                                 |       | 20,793,000  |        | 10,443,000  |       | 6,902,000   |       |
| Interest income                                        |       | 85,000      |        | 50,000      |       | 11,000      |       |
| Interest expense                                       |       | (6,000      | )           | (20,000     | )          | (26,000     | )          |
| Income from continuing operations before  income taxes |       | 20,872,000  |        | 10,473,000  |       | 6,887,000   |       |
| Provision for income taxes                             |       | 7,930,000   |        | 3,944,000   |       | 2,461,000   |       |
| Income from continuing operations                      |       | 12,942,000  |        | 6,529,000   |       | 4,426,000   |       |
| Income (loss) from discontinued operations             |       | —      |        | 129,000     |       | (1,697,000  | )          |
| Net income                                             |       | $           | 12,942,000  |        | $          | 6,658,000   |       | $ | 2,729,000 |   |
|                                                   |       |        |        |        |       |        |       |
| Earnings per share - Basic and Diluted:                |       |        |        |        |       |        |       |
| Continuing operations                                  |       | $           | 3.04        |        | $          | 1.54        |       | $ | 1.04 |   |
| Discontinued operations                                |       | —      |        | .03         |       | (.40        | )          |
| Total                                                  |       | $           | 3.04        |        | $          | 1.57        |       | $ | .64 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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# **INTERNATIONAL ALUMINUMCORPORATION**

**CONSOLIDATED BALANCE SHEETS**

June 30,2005 and 2004

 
| ** **                                                                        | ** ** | **2005**    | ** **  | **2004**    | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **Assets**                                                                        |       |        |        |        |       |
| ** **                                                                        |       |        |        |        |       |
| Current assets:                                                                   |       |        |        |        |       |
| Cash and cash equivalents                                                         |       | $           | 12,437,000  |        | $          | 15,964,000 |   |
| Accounts receivable, less allowance of $1,244,000  in 2005 and $1,447,000 in 2004 |       | 43,543,000  |        | 39,030,000  |       |
| Inventories                                                                       |       | 41,270,000  |        | 32,286,000  |       |
| Prepaid expenses and deposits                                                     |       | 2,055,000   |        | 1,864,000   |       |
| Deferred income taxes                                                             |       | 3,310,000   |        | 2,767,000   |       |
| Total current assets                                                              |       | 102,615,000 |        | 91,911,000  |       |
|                                                                              |       |        |        |        |       |
| Property, plant and equipment, at cost                                            |       | 125,081,000 |        | 121,828,000 |       |
| Accumulated depreciation                                                          |       | (78,179,000 | )           | (73,227,000 | )          |
| Net property, plant and equipment                                                 |       | 46,902,000  |        | 48,601,000  |       |
|                                                                              |       |        |        |        |       |
| Other assets:                                                                     |       |        |        |        |       |
| Goodwill                                                                          |       | 645,000     |        | 609,000     |       |
| Other                                                                             |       | 1,469,000   |        | 761,000     |       |
| Total other assets                                                                |       | 2,114,000   |        | 1,370,000   |       |
| Total Assets                                                                      |       | $           | 151,631,000 |        | $          | 141,882,000 |   |
|                                                                              |       |        |        |        |       |
| **Liabilities and Shareholders’ Equity**                                     |       |        |        |        |       |
|                                                                              |       |        |        |        |       |
| Current liabilities:                                                              |       |        |        |        |       |
| Accounts payable                                                                  |       | $           | 9,958,000   |        | $          | 10,858,000 |   |
| Accrued liabilities                                                               |       | 13,531,000  |        | 11,903,000  |       |
| Advances payable to banks                                                         |       | —      |        | 202,000     |       |
| Income taxes payable                                                              |       | 1,572,000   |        | 1,088,000   |       |
| Total current liabilities                                                         |       | 25,061,000  |        | 24,051,000  |       |
|                                                                              |       |        |        |        |       |
| Deferred income taxes                                                             |       | 6,067,000   |        | 6,625,000   |       |
| Total liabilities                                                                 |       | 31,128,000  |        | 30,676,000  |       |
|                                                                              |       |        |        |        |       |
| Commitments and contingencies (Note 4)                                            |       |        |        |        |       |
|                                                                              |       |        |        |        |       |
| Shareholders’ equity:                                                        |       |        |        |        |       |
| Common stock                                                                      |       | 4,791,000   |        | 4,765,000   |       |
| Paid-in capital                                                                   |       | 4,689,000   |        | 4,123,000   |       |
| Retained earnings                                                                 |       | 108,975,000 |        | 101,140,000 |       |
| Accumulated other comprehensive income                                            |       | 2,048,000   |        | 1,178,000   |       |
| Total shareholders’ equity                                                   |       | 120,503,000 |        | 111,206,000 |       |
| Total Liabilities and Shareholders’ Equity                                   |       | $           | 151,631,000 |        | $          | 141,882,000 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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# **INTERNATIONAL ALUMINUMCORPORATION**

# **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

Forthe years ended June 30, 2005, 2004 and 2003

 
| ** **                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                           |       |       |       |       |       |       |       |
| Cash flows from operating activities:          |       |       |       |       |       |       |       |
| Net income                                     |       | $          | 12,942,000 |       | $          | 6,658,000  |       | $ | 2,729,000 |   |
| Adjustments for noncash transactions:          |       |       |       |       |       |       |       |
| Depreciation and amortization                  |       | 6,269,000  |       | 6,526,000  |       | 6,985,000  |       |
| Change in deferred income taxes                |       | (1,101,000 | )          | (260,000   | )          | (91,000    | )          |
| Loss on discontinued operations                |       | —     |       | —     |       | 1,144,000  |       |
| Changes in assets and liabilities:             |       |       |       |       |       |       |       |
| Receivables                                    |       | (4,232,000 | )          | (4,667,000 | )          | (2,362,000 | )          |
| Inventories                                    |       | (8,811,000 | )          | (3,714,000 | )          | 3,894,000  |       |
| Prepaid expenses and other                     |       | (886,000   | )          | 490,000    |       | 899,000    |       |
| Accounts payable                               |       | (1,148,000 | )          | 3,434,000  |       | 570,000    |       |
| Accrued liabilities                            |       | 1,609,000  |       | 2,883,000  |       | 745,000    |       |
| Income taxes payable                           |       | 557,000    |       | 796,000    |       | 202,000    |       |
| Net cash provided by operating activities      |       | 5,199,000  |       | 12,146,000 |       | 14,715,000 |       |
|                                           |       |       |       |       |       |       |       |
| Cash flows from investing activities:          |       |       |       |       |       |       |       |
| Capital expenditures                           |       | (4,246,000 | )          | (3,482,000 | )          | (2,847,000 | )          |
| Proceeds from sales of capital assets          |       | 221,000    |       | 212,000    |       | 2,824,000  |       |
| Net cash used in investing activities          |       | (4,025,000 | )          | (3,270,000 | )          | (23,000    | )          |
|                                           |       |       |       |       |       |       |       |
| Cash flows from financing activities:          |       |       |       |       |       |       |       |
| Dividends paid to shareholders                 |       | (5,107,000 | )          | (5,094,000 | )          | (5,094,000 | )          |
| Exercise of stock options                      |       | 592,000    |       | —     |       | —     |       |
| Net repayments under lines of credit           |       | (220,000   | )          | (394,000   | )          | (575,000   | )          |
| Net cash used in financing activities          |       | (4,735,000 | )          | (5,488,000 | )          | (5,669,000 | )          |
|                                           |       |       |       |       |       |       |       |
| Effect of exchange rate changes                |       | 34,000     |       | 6,000      |       | 52,000     |       |
|                                           |       |       |       |       |       |       |       |
| Net change in cash and cash equivalents        |       | (3,527,000 | )          | 3,394,000  |       | 9,075,000  |       |
| Cash and cash equivalents at beginning of year |       | 15,964,000 |       | 12,570,000 |       | 3,495,000  |       |
| Cash and cash equivalents at end of year       |       | $          | 12,437,000 |       | $          | 15,964,000 |       | $ | 12,570,000 |   |
|                                           |       |       |       |       |       |       |       |   |   |   |
| Supplemental cash flow information:            |       |       |       |       |       |       |       |
| Interest payments                              |       | $          | 6,000      |       | $          | 20,000     |       | $ | 28,000 |   |
| Income tax payments                            |       | $          | 8,088,000  |       | $          | 3,184,000  |       | $ | 1,596,000 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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# **INTERNATIONAL ALUMINUMCORPORATION**

# **CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

Forthe years ended June 30, 2005, 2004 and 2003

 
| ** **                  | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated** | ** **  | ** **  | ** ** |
|-----------------------------|------------|------------------|------------|-------------|------------|--------------|------------|-------------------|------------|-----------------|-------------|-------------|------------|
| ** **                  | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**       | ** **  | ** **  | ** ** |
| ** **                  | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** **      | ** **  |
| ** **                  | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**  | ** ** | **Earnings**      | ** ** | **Income**      | ** **  | **Total**   | ** ** |
|                        |       |             |       |        |       |         |       |              |       |            |        |        |       |
| Balance, June 30, 2002 |       | 4,244,794        |       | $           | 4,765,000  |         | $          | 4,123,000         |       | $               | 101,941,000 |        | $          | (24,000 | ) | $ | 110,805,000 |   |
|                        |       |             |       |        |       |         |       |              |       |            |        |        |       |
| Net income                  |       |             |       |        |       |         |       | 2,729,000         |       |            |        | 2,729,000   |       |
| Translation adjustment      |       |             |       |        |       |         |       |              |       | 1,096,000       |        | 1,096,000   |       |
| Total comprehensive income  |       |             |       |        |       |         |       |              |       |            |        | 3,825,000   |       |
| Cash dividends              |       |             |       |        |       |         |       | (5,094,000        | )          |            |        | (5,094,000  | )          |
| Balance, June 30, 2003 |       | 4,244,794        |       | 4,765,000   |       | 4,123,000    |       | 99,576,000        |       | 1,072,000       |        | 109,536,000 |       |
|                        |       |             |       |        |       |         |       |              |       |            |        |        |       |
| Net income                  |       |             |       |        |       |         |       | 6,658,000         |       |            |        | 6,658,000   |       |
| Translation adjustment      |       |             |       |        |       |         |       |              |       | 106,000         |        | 106,000     |       |
| Total comprehensive income  |       |             |       |        |       |         |       |              |       |            |        | 6,764,000   |       |
| Cash dividends              |       |             |       |        |       |         |       | (5,094,000        | )          |            |        | (5,094,000  | )          |
| Balance, June 30, 2004 |       | 4,244,794        |       | 4,765,000   |       | 4,123,000    |       | 101,140,000       |       | 1,178,000       |        | 111,206,000 |       |
|                        |       |             |       |        |       |         |       |              |       |            |        |        |       |
| Net income                  |       |             |       |        |       |         |       | 12,942,000        |       |            |        | 12,942,000  |       |
| Translation adjustment      |       |             |       |        |       |         |       |              |       | 870,000         |        | 870,000     |       |
| Total comprehensive income  |       |             |       |        |       |         |       |              |       |            |        | 13,812,000  |       |
| Exercise of stock options   |       | 25,938           |       | 26,000      |       | 566,000      |       |              |       |            |        | 592,000     |       |
| Cash dividends              |       |             |       |        |       |         |       | (5,107,000        | )          |            |        | (5,107,000  | )          |
| Balance, June 30, 2005 |       | 4,270,732        |       | $           | 4,791,000  |         | $          | 4,689,000         |       | $               | 108,975,000 |        | $          | 2,048,000 |   | $ | 120,503,000 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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# **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1.  SignificantAccounting Policies and Procedures**

 

**Description of Business and Principles of Consolidation**

 

International Aluminum Corporation (theCompany) is an integrated building products manufacturer of diversified linesof quality aluminum and vinyl products. The consolidated financial statements include the accounts of theCompany and its domestic and foreign subsidiaries.  All significant intercompany transactions andaccounts have been eliminated in consolidation. Certain reclassifications of prior year information were made to conformto the current presentation.

 

# **Revenue Recognition**

 

Salesare recognized when products are shipped or services are provided, assuming nosignificant Company obligations remain and the collection of relatedreceivables is probable. Shipping charges billed to customers are included inNet Sales and shipping and handling charges incurred by the Company areincluded in Cost of Sales.  Standardshipping terms are FOB shipping point.

 

**Estimates and Assumptions**

 

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes.  Actual results could differ from thoseestimates.

 

**Cash and Cash Equivalents**

 

Cashand cash equivalents include cash on hand and marketable securities withoriginal maturities of three months or less at the date of purchase.

 

**Concentrations of Credit Risk**

 

TheCompany’s exposure to credit risk relates primarily to trade accountsreceivable from customers located throughout North America.  The Company performs ongoing creditevaluations of its customers’ financial condition.  An allowance for doubtful accounts isestablished based upon factors surrounding the credit risk of specificcustomers, historical trends and other information.  The Company did not have sales exceeding 5%to any single customer in 2005, 2004 or 2003.

 

**Inventory**

 

Inventoriesare valued at the lower of cost or market.  The cost is determined by the first-in,first-out (FIFO) method and inventories are reviewed for excess quantities andobsolescence.  Inventories at fiscal yearends were as follows:

 
| ** **        | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-------------------|------------|-----------|------------|-----------|------------|
| Raw materials     |       | $         | 34,720,000 |      | $          | 26,790,000 |   |
| Work in process   |       | 1,333,000 |       | 553,000   |       |
| Finished goods    |       | 5,217,000 |       | 4,943,000 |       |
| Total inventories |       | $         | 41,270,000 |      | $          | 32,286,000 |   |

 

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**Foreign Currency Translation**

 

Assetsand liabilities of the Company’s foreign subsidiaries are translated into U.S.dollars at year-end exchange rates and revenues and expenses are translated ataverage rates prevailing during the year. Local currency is considered to be the functional currency.  Translation adjustments are deferred intoaccumulated other comprehensive income, a separate component of shareholders’equity.  Foreign currency transactiongains and losses are included in results of operations as incurred.

 

**Depreciation and Amortization**

 

Depreciationand amortization are provided over the estimated useful lives of the assets (upto 40 years for buildings, 5 to 20 years for machinery and plant equipment, 3to 5 years for office equipment and computers and 2.5 to 7 years for vehicles)or the remaining terms of the leases, whichever is shorter, using thestraight-line method for financial reporting purposes and accelerated methodsfor tax purposes.

 

**Goodwill**

 

The excess of the purchase price over theunderlying book value of any companies acquired is classified as “Goodwill”.  The nominal increase in goodwill during 2005relates to the effect of applying fluctuating foreign exchange rates tobalances pertaining to our Canadian subsidiaries.  In accordance with SFAS 142, managementreviews the carrying value of goodwill for recoverability based on estimatedfair values of the reporting units in the fourth quarter of each year or whenevents or changes in circumstances indicate, in management’s judgment, that thecarrying value may not be recoverable. The Company considers operating results, trends and prospects of theCompany, as well as competitive comparisons. The Company also takes into consideration competition within thebuilding materials industry and any other events or circumstances which mightindicate potential impairment.  Noimpairments have been recorded since the initial adoption of SFAS 142.

 

**Income Taxes**

 

TheCompany accounts for income taxes under SFAS No. 109, “Accounting forIncome Taxes”.  SFAS No. 109requires an asset and liability approach for financial reporting for incometaxes.  Under SFAS No. 109, deferredtaxes are provided for temporary differences between the carrying values ofassets and liabilities for financial reporting and tax purposes at the enactedrates at which these differences are expected to reverse.

 

**Long-Lived Assets**

 

Wheneverevents indicate that the carrying values of long-lived assets may not be

 

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recoverable,the Company evaluates the carrying values of such assets using futureundiscounted cash flows to determine if an impairment exists.  If an impairment is determined to exist, anyrelated impairment loss is calculated based upon comparison of the fair valueto the carrying value of the assets.

 

**Advertising Expense**

 

TheCompany expenses advertising costs as incurred. Advertising expenses of approximately $2,424,000, $2,011,000 and $1,583,000were charged to selling, general and administrative expenses for the yearsended June 30, 2005, 2004 and 2003, respectively.

 

**Stock Based Compensation**

 

TheCompany granted stock options for the purchase of common stock to certainexecutive and managerial employees under the Company’s 1991 Stock Option Plan,whose expired granting authority has been transferred to the successor plan,the 2001 Stock Option Plan.  The optionshave an exercise price equal to the market price of the stock on the date ofgrant, a term of ten years and become exercisable in equal installments over afive-year period from the date of grant so long as the employees remain in thecontinuous employ of the Company.  TheCompany applies Accounting Principles Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related Interpretations in accounting forstock options granted under the plan. Under APB No. 25, compensation cost, if any, is recognized over therespective vesting period based on the difference, if any, on the date ofgrant, between the fair value of the Company’s common stock and the exerciseprice.  All options issued have anexercise price equal to the fair value on the date of grant.  Accordingly, no compensation cost has beenrecognized for those stock options.  On December 31,2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation — Transition and Disclosure”, which amends SFAS No. 123, “Accountingfor Stock-Based Compensation”.  SFAS No. 148’stransition guidance and provisions for disclosures are effective for fiscalyears ending after December 15, 2002. The Company did not adopt fair value accounting for employee stockoptions under SFAS No. 123 and SFAS No. 148.  Since all outstanding stock awards are fixedstock options with no intrinsic value at the date of grant and were fullyvested before the income statement periods presented, there would have been nochange in reported net income and earnings per share had compensation cost beendetermined based on the fair value at the grant dates as prescribed by SFAS123.

 

**Note 2.  Balance SheetComponents**

 
| **Property,  Plant and Equipment, at Cost** | ** ** | **2005**   | ** **  | **2004**   | ** ** |
|---------------------------------------------|------------|------------|-------------|------------|------------|
| Land                                        |       | $          | 6,953,000   |       | $          | 6,857,000 |   |
| Buildings and improvements                  |       | 29,932,000 |        | 29,481,000 |       |
| Machinery and equipment                     |       | 74,016,000 |        | 73,485,000 |       |
| Office Equipment/Computers                  |       | 7,427,000  |        | 7,424,000  |       |
| Vehicles                                    |       | 4,478,000  |        | 4,541,000  |       |
| Construction in process                     |       | 2,275,000  |        | 40,000     |       |
|                                        |       | $          | 125,081,000 |       | $          | 121,828,000 |   |

 

----

 
| **Accrued  Liabilities**       | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| Wages and compensated absences |       | $         | 8,167,000  |      | $          | 7,474,000 |   |
| Taxes, other than income taxes |       | 1,393,000 |       | 1,147,000 |       |
| Dividends                      |       | 1,281,000 |       | 1,273,000 |       |
| Other                          |       | 2,690,000 |       | 2,009,000 |       |
|                           |       | $         | 13,531,000 |      | $          | 11,903,000 |   |

 

**Note 3.  Short-TermDebt and Lines of Credit**

 

TheCompany has a loan agreement with a domestic bank providing for a $20,000,000unsecured short-term line of credit. There were no amounts outstanding underthe agreement at June 30, 2005 or June 30, 2004.  Additionally the Company’s foreignsubsidiaries have loan agreements with a foreign bank providing for $2,250,000in collateralized short-term lines of credit, at the prevailing Canadian primeinterest rate (4.25% as of June 30, 2005). There were no amounts outstanding under the agreements at June 30,2005; $202,000 was outstanding at June 30, 2004.

 

**Note 4.  Commitmentsand Contingencies**

 

TheCompany is committed under real property lease agreements expiring at variousdates to 2009.  Certain of the leaseshave renewal options for periods up to five years and others provide for rentrevisions at various dates.  Under theleases the Company is obligated to pay property taxes, insurance andmaintenance.  All facility leases areclassified as operating leases.

 

Real property rental expense was $806,000in 2005, $801,000 in 2004, and $977,000 in 2003.  Real property rental commitments are $827,000in 2006, $528,000 in 2007, $348,000 in 2008 and $150,000 in 2009.

 

The Company is party to various claims,legal actions and complaints arising in the ordinary course of business. In theopinion of management, all such matters are without merit or are of such kind,or involve such amounts, that an unfavorable disposition would not have amaterial adverse effect on the consolidated financial position, results ofoperations or cash flows of the Company.

 

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**Note 5.  Stock Options**

 

Thetransactions for shares under options for the 1991 and 2001 Stock Option Plansfor the three years ended June 30, 2005 were:

 
| ** **                                                                       | ** ** | **Outstanding** | ** ** | **Exercisable**      | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                                                       | ** ** | **Number Of**   | ** ** | **Weighted-Average** | ** ** | **Number Of** | ** ** | **Weighted-Average** | ** ** |
| ** **                                                                       | ** ** | **Shares**      | ** ** | **Exercise Price**   | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding, June 30, 2002                                                  |       | 108,000         |       | $                    | 28.54      |   | 103,800 |   | $ | 28.45 |   |
| Exercised                                                                        |       | —          |       |                 |       |   |   |   |   |
| Outstanding, June 30, 2003                                                  |       | 108,000         |       | 28.54                |       | 108,000 |   | 28.54 |   |
| Exercised                                                                        |       | —          |       |                 |       |   |   |   |   |
| Outstanding, June 30, 2004                                                  |       | 108,000         |       | 28.54                |       | 108,000 |   | 28.54 |   |
| Exercised                                                                        |       | 52,474          |       | 28.17                |       | 55,526 |   | 28.89 |   |
| Outstanding, June 30, 2005                                                  |       | 55,526          |       | 28.89                |       | 55,526 |   | 28.89 |   |
|                                                                             |       |            |       |                 |       |   |   |   |   |
| Stock Option Summary at June 30, 2005:  $28.00-$31.56 (Life: 0.4-2.6 years) |       | 55,526          |       | 28.89                |       | 55,526 |   | 28.89 |   |
| Available for future grants                                                      |       | 389,700         |       |                 |       |   |   |   |   |
|                                                                                  |            |                 |            |                      |            |  |  |  |  |  |  |

 

**Note 6.  Earnings PerShare**

 

Basicearnings per share is computed by dividing net income by the weighted-averagenumber of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by theweighted-average common shares and potentially dilutive common equivalentshares outstanding determined as follows:

 
| ** **                                                     | ** ** | **2005**  | ** ** | **2004**  | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Numerator:                                                     |       |      |       |      |       |       |       |
| Income before effect of discontinued operations                |       | $         | 12,942,000 |      | $          | 6,529,000  |       | $ | 4,426,000 |   |
| Income (loss) from discontinued operations                     |       | —    |       | 129,000   |       | (1,697,000 | )          |
| Net Income                                                     |       | $         | 12,942,000 |      | $          | 6,658,000  |       | $ | 2,729,000 |   |
|                                                           |       |      |       |      |       |       |       |
| Denominator:                                                   |       |      |       |      |       |       |       |
| Weighted-average shares outstanding used to compute basic EPS  |       | 4,252,728 |       | 4,244,794 |       | 4,244,794  |       |
| Incremental shares issuable upon the exercise of stock options |       | 6,928     |       | 3,401     |       | —     |       |
| Shares used to compute diluted EPS                             |       | 4,259,656 |       | 4,248,195 |       | 4,244,794  |       |
|                                                           |       |      |       |      |       |       |       |
| Basic and Diluted net earnings (loss) per share:               |       |      |       |      |       |       |       |
| Before effect of discontinued operations                       |       | $         | 3.04       |      | $          | 1.54       |       | $ | 1.04 |   |
| Discontinued operations                                        |       | —    |       | .03       |       | (.40       | )          |
| Basic and Diluted net earnings per share                       |       | $         | 3.04       |      | $          | 1.54       |       | $ | .64 |   |

 

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Incrementalshares issuable upon the assumed exercise of outstanding stock options arecomputed using the average market price of common stock during the relatedperiod.  The incremental shares for the fiscalyears ending 2005, 2004 and 2003 exclude 8,625, 60,750 and 108,000 stock optionshares, respectively, because their inclusion would be anti-dilutive, since theoption price was greater than the Company’s average common stock price for relatedperiods.

 

**Note 7.  Capital Stock**

 

TheCompany has 500,000 shares of preferred stock authorized, with a $10 par value,none of which is outstanding.  There are10,000,000 shares of common stock authorized, $1 par value, of which 4,270,732shares were outstanding at June 30, 2005 and 4,244,794 were outstanding atJune 30, 2004.

 

**Note 8.  Acquisitionsand Divestitures**

 

During fiscal years 2003 and 2002, theCompany ceased operations of International Window-Colorado and MaestroProducts, respectively, window and door subsidiaries which were components ofthe Residential Products segment. In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, the Company wrote downthe net assets of these subsidiaries to their estimated net realizable valueand reported their results as discontinued operations.  Amounts in the income statements and relatednotes for all periods shown were restated to reflect discontinued operationsaccounting.  Included in consolidatedresults is $1,320,000 for fiscal 2003 related primarily to inventory andgoodwill write-downs at International Window-Colorado and $1,175,000 for fiscal2002 for write-downs of various assets at Maestro Products, primarilyinventory.  Due to favorable accountsreceivable collections and the sale of a portion of the Window-Coloradoequipment and inventory the Company recognized a pre-tax gain of $215,000 infiscal 2004. In fiscal 2003 the Company realized a pre-tax gain of $176,000 inexcess of projections on sale of the real property of Maestro Products.  Each of the gains have likewise beenclassified as discontinued operations. The Company does not anticipate anyfuture activity with respect to either of these subsidiaries.

 

Summarizedresults of the discontinued businesses are shown separately as discontinuedoperations in the accompanying income statements.  Results of the discontinued operations, inthousands of dollars, are as follows:

 

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| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                      |       | $        | —     |     | $          | —   |       | $ | 1,787 |   |
|                                           |       |     |       |     |       |     |       |
| Income (loss) before income taxes              |       | $        | —     |     | $          | 215      |       | $ | (2,638 | ) |
| Income tax provision (benefit)                 |       | —   |       | 86       |       | (941     | )          |
| Net income (loss) from discontinued operations |       | $        | —     |     | $          | 129      |       | $ | (1,697 | ) |
|                                           |       |     |       |     |       |     |       |
| Earnings per share:                            |       |     |       |     |       |     |       |
| Discontinued operations - Diluted              |       | $        | —     |     | $          | .03      |       | $ | (.40 | ) |

 

# **Note 9. Income Taxes**

 

The components of income before U.S. andforeign income taxes are:

 
| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**   | ** ** |
|------------|------------|----------|------------|----------|------------|------------|------------|
| Domestic   |       | $        | 20,535,000 |     | $          | 10,567,000 |       | $ | 4,491,000 |   |
| Foreign    |       | 337,000  |       | 121,000  |       | (242,000   | )          |
|       |       | $        | 20,872,000 |     | $          | 10,688,000 |       | $ | 4,249,000 |   |

 

Theprovision for income taxes is comprised of the following:

 
| ** **                      | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| Current -                       |       |       |       |      |       |      |       |
| Federal                         |       | $          | 7,776,000  |      | $          | 3,487,000 |       | $ | 1,208,000 |   |
| State                           |       | 984,000    |       | 568,000   |       | 261,000   |       |
| Foreign                         |       | 271,000    |       | 235,000   |       | 187,000   |       |
|                            |       | 9,031,000  |       | 4,290,000 |       | 1,656,000 |       |
| Deferred -                      |       |       |       |      |       |      |       |
| Federal                         |       | (876,000   | )          | (6,000    | )          | 214,000   |       |
| State                           |       | (75,000    | )          | (33,000   | )          | (31,000   | )          |
| Foreign                         |       | (150,000   | )          | (221,000  | )          | (319,000  | )          |
|                            |       | (1,101,000 | )          | (260,000  | )          | (136,000  | )          |
|                            |       | $          | 7,930,000  |      | $          | 4,030,000 |       | $ | 1,520,000 |   |
|                            |       |       |       |      |       |      |       |
| Allocation of total provision - |       |       |       |      |       |      |       |
| Continuing operations           |       | $          | 7,930,000  |      | $          | 3,944,000 |       | $ | 2,461,000 |   |
| Discontinued operations         |       | —     |       | 86,000    |       | (941,000  | )          |
| Total provision                 |       | $          | 7,930,000  |      | $          | 4,030,000 |       | $ | 1,520,000 |   |

 

----

 

Areconciliation between the provisions for income taxes, computed by applyingthe Federal statutory rate to income before taxes, and the book provisions forincome taxes follows:

 
| ** **                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**  | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Tax provision on book income at statutory rate         |       | $        | 7,305,000  |     | $          | 3,641,000 |       | $ | 1,445,000 |   |
| Increases (decreases) resulting from:                  |       |     |       |     |       |      |       |
| State income taxes, net of Federal income  tax benefit |       | 591,000  |       | 353,000  |       | 152,000   |       |
| Other                                                  |       | 34,000   |       | 36,000   |       | (77,000   | )          |
| Provision for income taxes                             |       | $        | 7,930,000  |     | $          | 4,030,000 |       | $ | 1,520,000 |   |

 

Deferredincome taxes result from temporary differences in the recognition of income andexpenses for tax and financial statement purposes.  The tax effects of the significant temporarydifferences that comprise the deferred tax assets and liabilities at year endare as follows:

 
| ** **                            | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|
| Accounts receivable                   |       | $         | 423,000    |      | $          | 503,000 |   |
| Inventory                             |       | 387,000   |       | 330,000   |       |
| Accrued liabilities                   |       | 1,478,000 |       | 1,144,000 |       |
| Canadian operating loss carryforwards |       | 999,000   |       | 954,000   |       |
| Other                                 |       | 23,000    |       | (164,000  | )          |
| Net deferred tax asset                |       | $         | 3,310,000  |      | $          | 2,767,000 |   |
|                                  |       |      |       |      |       |
| Property, plant and equipment         |       | $         | 5,953,000  |      | $          | 6,461,000 |   |
| Other                                 |       | 114,000   |       | 164,000   |       |
| Net deferred tax liability            |       | $         | 6,067,000  |      | $          | 6,625,000 |   |

 

Noprovision for U.S. taxes has been made for undistributed earnings of theforeign subsidiaries since it is expected that the major portion of suchearnings will continue to

 

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bereinvested for an indefinite period.  TheCompany has Canadian net operating loss carryforwards that expire between 2009and 2011.  Management believes that it ismore likely than not that the Company will generate sufficient taxable incomein the appropriate carryforward periods to realize the benefit of the Canadiannet operating loss carryforwards.

 

**Note 10.  SegmentInformation**

 

TheCompany’s operations are organized and managed by product type.  The Company currently operates in threesegments of the building products industry: Commercial Products, Residential Products and Aluminum Extrusion. Seethe front cover of this Annual Report for a description of the products of eachsegment and Page 28 for a listing of the subsidiaries of each segment.

 

TheCompany uses a portion of its aluminum extrusion production in its Commercialand Residential segments.  Transfers aremade at market prices.  Accountingpolicies for the segments are the same as those described in Note 1. TheCompany evaluates performance based on operating income or loss before anyallocation of corporate overhead, interest or taxes.

 

Thefollowing is significant financial information by operating segment,reconciling to the Company’s totals.

 
| ** **          | ** ** | **Sales** | ** ** | **Operating Income** | ** ** |
|---------------------|------------|-----------|------------|----------------------|------------|
| **(In  thousands)** | ** ** | **2005**  | ** ** | **2004**             | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Commercial          |       | $         | 123,604    |                 | $          | 99,807 |   | $ | 98,044 |   | $ | 15,518 |   | $ | 8,335 |   | $ | 6,782 |   |
| Residential         |       | 74,443    |       | 65,355               |       | 53,784 |   | 13,791 |   | 11,049 |   | 8,581 |   |
| Aluminum Extrusion  |       | 114,807   |       | 97,378               |       | 83,173 |   | 951 |   | 709 |   | (209 | ) |
| Total segments      |       | 312,854   |       | 262,540              |       | 235,001 |   | 30,260 |   | 20,093 |   | 15,154 |   |
| Eliminations        |       | (61,266   | )          | (49,506              | )          | (42,452 | ) | 273 |   | (668 | ) | (422 | ) |
| Corporate           |       | —    |       | —               |       | — |   | (9,740 | ) | (8,982 | ) | (7,830 | ) |
| Total               |       | $         | 251,588    |                 | $          | 213,034 |   | $ | 192,549 |   | $ | 20,793 |   | $ | 10,443 |   | $ | 6,902 |   |

 
| ** **          | ** ** | **Capital Expenditures** | ** ** | **Depreciation and Amortization** | ** ** |
|---------------------|------------|--------------------------|------------|-----------------------------------|------------|
| **(In  thousands)** | ** ** | **2005**                 | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Commercial          |       | $                        | 688        |                              | $          | 542 |   | $ | 1,091 |   | $ | 1,698 |   | $ | 1,820 |   | $ | 1,972 |   |
| Residential         |       | 3,110                    |       | 2,075                             |       | 687 |   | 1,798 |   | 1,847 |   | 2,094 |   |
| Aluminum Extrusion  |       | 367                      |       | 519                               |       | 789 |   | 2,410 |   | 2,481 |   | 2,509 |   |
| Total segments      |       | 4,165                    |       | 3,136                             |       | 2,567 |   | 5,906 |   | 6,148 |   | 6,575 |   |
| Corporate           |       | 81                       |       | 346                               |       | 280 |   | 363 |   | 378 |   | 410 |   |
| Total               |       | $                        | 4,246      |                              | $          | 3,482 |   | $ | 2,847 |   | $ | 6,269 |   | $ | 6,526 |   | $ | 6,985 |   |

 
| ** **          | ** ** | **Total Assets** | ** ** |
|---------------------|------------|------------------|------------|
| **(In  thousands)** | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Commercial          |       | $                | 66,353     |   | $ | 60,922 |   |
| Residential         |       | 32,076           |       | 27,105 |   |
| Aluminum Extrusion  |       | 42,010           |       | 38,130 |   |
| Total segments      |       | 140,439          |       | 126,157 |   |
| Corporate           |       | 11,192           |       | 15,725 |   |
| Total               |       | $                | 151,631    |   | $ | 141,882 |   |

 

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**Note11.  Current and Pending AccountingChanges**

 

TheAmerican Jobs Creation Act of 2004 (the “AJCA”) was signed into law on October 22,2004.  The AJCA contains numerous changesto U.S. tax law, both temporary and permanent in nature, including a potentialtax deduction with respect to certain qualified domestic manufacturingactivities, changes in the carryback and carryforward utilization periods forforeign tax credits and a dividend received deduction with respect toaccumulated income earned abroad. The new law could potentially have an impacton the Company’s effective tax rate, future taxable income and cash and taxplanning strategies, amongst other effects. In December 2004, the FASBissued Staff Position No. 109-1 (“FSP 109-1”), Application of FASBStatement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004 and Staff Position No. 109-2 (“FSP 109-2”), Accounting and DisclosureGuidance for the Foreign Earnings Repatriation Provision within the AmericanJobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturer’s taxdeduction provided for under the AJCA should be accounted for as a specialdeduction in accordance with SFAS No. 109 and not as a tax ratereduction.  FSP 109-2 provides accountingand disclosure guidance for the repatriation of certain foreign earnings to aU.S. taxpayer as provided for in the AJCA. The Company has no plans to repatriate foreign earnings.  We are currently in the process of evaluatingthe impact that other portions of the Act may have on our financial positionand results of operations.

 

InNovember 2004, the Financial Accounting Standards Board (FASB) issued SFASNo. 151, “Inventory Costs” (SFAS 151), which clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial.  SFAS 151 will be effective forinventory costs incurred beginning July 1, 2005.  Upon adoption in fiscal year 2006 we do notanticipate that SFAS 151 will have a material impact on our financialstatements.

 

InDecember 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-BasedPayment”, which replaced SFAS No. 123 and superseded APB Opinion No. 25.SFAS No. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values in the first interim or annual period beginningafter June 15, 2005.  The pro formadisclosures previously permitted under SFAS No. 123 will no longer be analternative to financial statement recognition. As previously disclosed in the Stock Based Compensation note, we do notbelieve the adoption of SFAS 123R will have an impact on our financialstatements.

 

InMarch 2005, the FASB issued Financial Interpretation No. 47 (FIN 47),“Accounting for Conditional Asset Retirement Obligations”.  FIN 47 is an interpretation of FASB StatementNo. 143, “Accounting for Asset Retirement Obligations” and clarifies (i) thatan entity is required to recognize a liability for the fair value of aconditional asset retirement obligation when incurred if the liability’s fairvalue can be reasonably estimated and (ii) when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement obligation.  Upon adoption infiscal year 2006 we do not anticipate that FIN 47 will have a material impacton our financial statements.

 

InMay 2005, the FASB issued SFAS No. 154 (SFAS 154), “Accounting Changesand Error Corrections — a replacement of APB Opinion No. 20 and FASBStatement No. 3”.  Under theprevious guidance, most voluntary changes in accounting principle were requiredto be recognized as the cumulative effect of a change in accounting principlewithin the net income of the periods in which the change is made.  SFAS 154 requires retrospective application toprior period financial statements of a voluntary change in accountingprinciple, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005.

 

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**CORPORATEINFORMATION**

 
| **DIRECTORS**                                        | **OFFICERS**                                          |
|------------------------------------------------------|-------------------------------------------------------|
|                                                 |                                                  |
| Cornelius  C. Vanderstar                             | Ronald  L. Rudy                                       |
| Chairman  of the Board                               | President &  Chief Executive Officer         |
|                                                 |                                                  |
| Ronald  L. Rudy                                      | Mitchell  K. Fogelman                                 |
|                                                 | Senior  Vice President - Finance & Secretary |
| David  C. Treinen                                    |                                                  |
| Retired  President of                                | William  G. Gainer                                    |
| International  Aluminum Corporation                  | Vice  President - Sales & Marketing          |
|                                                 |                                                  |
| David  M. Antonini                                   | Stanley  M. Kutch                                     |
| Retired  Partner in White, Nelson & Co. LLP | Vice  President - Information Systems                 |
|                                                 |                                                  |
| John  P. Cunningham                                  | Susan  L. Leone                                       |
| Retired  President of                                | Vice  President - Human Resources                     |
| International  Aluminum Corporation                  |                                                  |
|                                                 |                                                  |
| Alexander  L. Dean                                   |                                                  |
| President  of David Brooks Company                   |                                                  |
|                                                 |                                                  |
| Joel  F. McIntyre  Attorney At Law                   | **FINANCIAL INFORMATION ON CORPORATE WEBSITE**        |
|                                                 |                                                  |
|                                                 | The  Company makes available on its                   |
|                                                 | website,  www.intlalum.com, its periodic              |
|                                                 | reports  on Form 10-K and 10-Q as soon as        |
|                                                 | reasonably  practicable after they have               |
|                                                 | been  filed.                                          |
|                                                 |                                                  |
| **STOCK TRANSFER AGENT AND REGISTRAR**               | **ELECTRONIC TRANSFER OF DIVIDENDS**                  |
|                                                 |                                                  |
| Continental  Stock Transfer & Trust Company | For  information and forms, write to:                 |
| 17  Battery Place                                    | Corporate  Secretary                                  |
| New  York, NY 10004                                  | International  Aluminum Corporation                   |
| (212)  509-4000                                      | P.  O. Box 6                                          |
| Internet  at www.continentalstock.com                | Monterey  Park, CA 91754                              |
|                                                 |                                                  |
| **STOCK EXCHANGE LISTING**                           | **ANNUAL SHAREHOLDERS MEETING**                       |
|                                                 |                                                  |
| The  Company’s common stock (trading            | 2 p.m.,  Thursday, October 27, 2005         |
| symbol:  IAL) is listed on the New York              | International  Aluminum Corporation                   |
| Stock  Exchange                                      | 767  Monterey Pass Road                               |
|                                                 | Monterey  Park, CA 91754                              |

 

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| **SUBSIDIARIES  BY SEGMENT**                             | ** **                                 |
|----------------------------------------------------------|--------------------------------------------|
| ** **                                               | ** **                                 |
| **COMMERCIAL**                                           | **RESIDENTIAL**                            |
|                                                     |                                       |
| *Douglas R. Ellerbrock*                                  | *George L. Hall*                           |
| *Executive Vice President*                               | *Executive Vice President*                 |
| *Commercial Products Group*                              | *Residential Products Group*               |
|                                                     |                                       |
| **Exterior Products**                                    | International  Window Corporation          |
|                                                     | South Gate, California                     |
| United  States Aluminum Corporation                      |                                       |
| Vernon, California                                       | International  Window-Northern California  |
|                                                     | Hayward, California                        |
| United  States Aluminum Corporation-Illinois             |                                       |
| Bedford Park, Illinois                                   | International  Window-Arizona, Inc.   |
| Boston, Massachusetts                                    | Phoenix, Arizona                           |
| Detroit, Michigan                                        |                                       |
|                                                     |                                       |
| United  States Aluminum Corporation-Texas                |                                       |
| Waxahachie, Texas                                        |                                       |
| Denver, Colorado                                         |                                       |
| St. Louis, Missouri                                      |                                       |
| Dallas, Texas                                            |                                       |
| Houston, Texas                                           |                                       |
|                                                     |                                       |
| United  States Aluminum Corporation-Carolina             |                                       |
| Rock Hill, South Carolina                                |                                       |
| Atlanta, Georgia                                         |                                       |
| Baltimore, Maryland                                      |                                       |
|                                                     |                                       |
| United  States Aluminum Of Canada-British Columbia, Ltd. |                                       |
| Langley, British Columbia, Canada                        | **ALUMINUM EXTRUSION**                     |
|                                                     |                                       |
| United  States Aluminum Of Canada-Ontario, Ltd.          | *David A. King*                            |
| Guelph, Ontario, Canada                                  | *Executive Vice President*                 |
|                                                     | *Aluminum Extrusion Group*                 |
| **Interior Products**                                    | ** **                                 |
|                                                     | International  Extrusion Corporation       |
| Raco  Interior Products, Inc.                       | Alhambra, California                       |
| Houston, Texas                                           |                                       |
| Waxahachie, Texas                                        | International  Extrusion Corporation-Texas |
| Dallas, Texas                                            | Waxahachie, Texas                          |

 

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| International  Aluminum Corporation |   |
|-------------------------------------|--------|
| 767  Monterey Pass Road             |   |
| Monterey  Park, California 91754    |   |
| Tel:  (323) 264-1670                |   |
| Fax:  (323) 266-3838                |   |
| Web:  www.intlalum.com              |   |

 

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